According to a 2019 study by Startup Genome, 90% of startups fail, and one of the most prevalent reasons is a lack of capital.
Even if your startup has made it through the first year, thanks to a successful round of funding, you’re still in the early stages of the business and will likely need more capital to grow.
Understanding these startup funding rounds is crucial for founders as it can help them gauge where they stand regarding capital needs and business growth. At each funding stage, you’ll need to find reliable funding sources.
But this can be time-consuming and sometimes come with strings attached. At Founderpath, we will discuss early-stage startup funding basics and present common funding sources for the different funding stages.
What Is Early-Stage Startup Funding?
Early-stage startup funding happens in the early development of a business that has the potential to occupy a large market share of the industry they want to disrupt.This funding serves to take a startup from an idea to a revenue-generating business. There are essentially three types of early-stage business funding:
- Pre-seed: This funding helps start the business and is based on a viable idea and business plan.
- Seed: This is the funding to develop and bring the product into the market.
- Growth: This is funding to boost sales, introduce new products, or expand into new markets, i.e., grow the business.
In terms of years, early-stage startup capital will most likely cover the first 5 years of growing your business. But some startups may take longer to grow and expand.
Even if your startup has created a product or service, has employees, and is generating revenue, it still may be in its early stages. Many in the tech industry use the 50-100-500 rule as a benchmark for when a startup stops being a startup.
According to this, a company that has a revenue of over $50 million, 100 or more employees, and a valuation of $500 million or more is no longer a startup. If your startup has not yet reached this level, it’s still in the early stages and most likely needs a continuous capital injection.
Your company valuation helps determine where it lies in the startup trajectory and how it should be funded.You can get an accurate valuation of your startup with Founderpath.
Rounds of Startup Funding
There are several stages of investing depending on the startup’s valuation, revenue, or size. Early-stage startup funding has developed into a multi-billion dollar industry. As a result, we have clearly defined stages or rounds of startup funding.
Ex-partner at Founder Collective, Parul Singh has created a table describing the different stages of a startup based on its monthly revenue and drawn from internal data:
|Stage||Monthly Revenue||Round Size||When to Start Funding Round||Funding Sources|
|Pre-seed Funding||$0 – $25,000||$0 – $750,000||To fund the creation of the product prototype||FounderFriends and familyAcceleratorsAngel investors|
|Seed Funding||$25,000 – $150,000||$500,000 – $2 million||After identifying the market opportunity and ideal customer||Accelerators Angel investorsDedicated seed funds|
|Series A Funding||Over $200,000||$2 million – $15 million||To grow the team and scale the company||Venture capital firmsDedicated series A funds Private equity firms|
There are two more rounds of funding, Series B and Series C. However, these funding stages come after the development stage of the startup, so they are not relevant for this topic.
Pre-seed funding is the very first stage of startup funding which helps take the business idea off the ground. At this stage, there may not even be a product or service but just the idea. Pre-seed investors provide funding based on that idea. However, that’s not always the case, as functional startups may qualify for pre-seed funding.
As per the seed gradient, the pre-seed funding round applies to startups ranging from those with no monthly revenue to those with monthly revenue of up to $25,000.
Pre-seed investors often include family, friends, and angel investors. However, many founders also invest their own capital at this stage. The average pre-seed funding is $500,000. However, the number can be higher. For instance, a Nigerian startup raised seed funding of $1 million, with major investments from Samurai Incubate and Consonance Investment.
The seed round of funding is a more official funding stage as, at this point, the startup has achieved a form of product-market fit. Seed funding is often the first official round of funding for early-stage companies.
At this stage, the startup would have employees and a working business strategy. It may have a working version of the product or service ready. Most importantly, it would have a monthly revenue of $25,000 to $150,000.
This round of funding is significant as it helps startups take the initial steps with market research and product development. The average seed funding amount in 2020 was $2.2 million, according to Fundz.
Some successful tech companies today raised millions of dollars as seed funding. A good example of that is Australian design company Canva, which raised $3 million in seed funding in 2013. Today, the company is valued at $40 billion.
Series A Funding
Series A funding is the first investment round after a startup has successfully raised seed funding. This round of funding refers to investment in a startup that has shown progress and potential for growth. In other words, Series A funding helps startups grow their business and strategize for long-term revenue generation.
This is the funding round where more prominent investors are interested in providing capital. In 2021, the median Series A funding was $10 million.
Series A funding for early-stage companies depends on the valuation. Typically, startups in this round of funding are valued at $24 million or above.
This is the stage where venture capitalists are interested in investing in the startup and taking it to the next level. Sequoia Capital, one of the largest Venture Capitalist companies in the US, recently invested $33 million of Series A funding in Veed.io, a video-editing platform.
What Are the Sources of Early-Stage Startup Funding?
Early-stage startup funding can come from various sources, depending on the size and scope of investment. Here are the common sources of funding startups use for pre-seed and seed round of funding and later for Series A funding.
The term bootstrapping is used for startup funding using personal capital, business capital, or funds from friends or family. It also refers to reinvesting profits from the company’s early revenue.
With the rise of founders growing scalable software-as-a-service startups that don’t want to accept venture funding and other types of equity-based financing, alternative methods of startup financing have emerged.
For instance, Founderpath invests capital based on the projected earnings of the SaaS company. So you get money in advance based on the money you will make. The platform provides a thorough valuation based on real-time data to make sure you’re getting everything you deserve.